An expected 25 basis-point hike will probably level fed fund rates at 5.25%. Why is the fed rate so important? What are its implications? Well the fed rate is a thermometer which gages inflation and provides a temperature for the economy. It’s the one signal that the financial community monitors and which has an indirect impact on global trade flows. So what do the movements actually do?
A decrease in the federal funds interest rate stimulates economic growth, but an excessively high level of economic activity can cause inflation pressures to build to a point that ultimately undermines the sustainability of an economic expansion. An increase in the federal funds interest rate will curb economic growth and help contain inflation pressures, and thus can promote the sustainability of an economic expansion. However, too large an increase could set-up economic growth.
So what does this mean for the UK? Well not too good as we are closely tied with the US economy. It seems the rest of Europe is benefiting from an up tick in domestic demand while the UK is weakening primarily from deteriorating consumer consumption. Be weary of an appreciation in the euro!
So what’s the best alternative? As we mentioned before, start taking profits particularly from sectors such as basis materials. We believe there is going to be a pause in its momentum especially as we believe world growth is going to slow. So what should I be buying? Healthcare, retail and utility stocks. Stay away from the insurance, automobile and bank sectors. You could get badly burnt.
These views are independent of FactSet Europe Ltd and are proprietary to Bobby Rakhit. For the full report and individual sector reviews and recommendations please contact rakhitreport@yahoo.co.uk.